To obtain a loan from a lender, a borrower executes a loan agreement and a security instrument that often secures collateral such as automobile, real estate or improvements the borrower purchased with the funds obtained from the lender. The term “borrower” is used interchangeably with the term “debtor” and the term “lender” is used interchangeably with the term “creditor”.
If the debtor fails to perform any of the debtor's obligations under the terms and conditions of the loan agreement, the debtor is in default. In the case of a mortgage loan, a typical default arises if the debtor fails to pay the monthly mortgage payment due under the loan agreement. Upon default, and so long as the creditor follows debt collection procedures per the terms of the mortgage document and complies with federal and state laws, the creditor can cause the property securing the loan agreement to be sold at a foreclosure sale. Since foreclosure is a harsh remedy to be resorted to only under the direst circumstances, failure to comply with even the most minute federal or state consumer protection, debt collection, property, title and business statutes related to the enforcement of security interest can result in a wrongful foreclosure or class action lawsuit with negative economic consequences for the lender.
Because of the legal issues involved with enforcing a loan agreement, most creditors retain a loan servicer to be their duly authorized agent or representative to handle the day to day loan level administrative details related to a loan. When a loan goes into default the loan servicer, as the creditor's representative, initiates a debt collection process. Depending on the creditor and/or the extent of the default, legal counsel is retained to continue the debt collection.
At any time during the life of the loan, the debtor may file bankruptcy, which forces the creditor to (a) cease any collection activities, including a foreclosure proceeding, repossession or otherwise suffer severe economic sanctions from the bankruptcy court, and (b) requires the creditor to deal with the debtor's default under the auspices of the bankruptcy court and the federal bankruptcy code. If the creditor seeks to enforce its loan instrument or security agreement that is in default, the creditor must timely file a proof of claim (“POC”), also referred to as “claim”, in the bankruptcy court.
In a typical bankruptcy, there may be several creditors involved for a single debtor in bankruptcy, wherein each creditor may file one or more claims against the debtor. The court appoints a trustee to manage the claims against the debtor. The trustee collects payments from the debtor and distributes the payments to the creditors in order to satisfy the claims against a loan, according to the bankruptcy plan confirmed by the bankruptcy court. There are approximately 200 trustees nationwide that collect and distribute debtor payments to satisfy bankruptcy claims filed by creditors in approximately 284 bankruptcy courts.
Since the trustees are responsible for managing the claims, they are required to ensure that their books and records related to the claims are properly maintained. The trustees ensure that payments made to the trustee by the debtors are properly distributed to the correct creditors as confirmed by the court.
The loan servicer, on behalf of the creditor, tracks and maintains the loan and claims during the term of a bankruptcy. The loan servicer ensures that payments received from the trustee and from the debtor are properly applied to the correct loan and associated claim, and that the books and records reflect the correct state of payments.
In order to properly service the claims, the loan servicer must match the claims to one or more specific loans. Since there is no common identifier for matching a claim to a loan, the process of matching can be labor intensive.
During the term of the bankruptcy, the trustee sends a payment to the creditor by a check (sometimes via ACH). The trustee typically encloses a payment voucher with the check. The payment voucher provides information about the payment, including bankruptcy case number and claim number, and sometimes includes the debtor name and corresponding account/loan number. The loan servicer is required to apply the payments to the debtor's loan in accordance with the bankruptcy court-confirmed plan.
In order to apply the payments to the debtor's account, the voucher and the check must be matched to the correct claim(s) and the corresponding loan(s). Unfortunately, the matching process is complicated because the claims may be related to different loan parts: a pre-petition payment, a post-petition on-going payment, an agreed order payment or an interest on arrears payment.
Also, the trustees are not required to adhere to a defined standard for voucher details nor are they required to apply common business definitions, (e.g. they often do not provide enough detailed information delineating the amounts for each loan and each claim), making the interpretation of the voucher detail difficult for the loan servicer to apply the correct amounts to the correct claim(s) and associated loan(s).
After the check is matched with the correct claim(s) and the corresponding loan(s) are identified, the payment must be applied according to the court-confirmed plan (e.g., payments applied to the correct loan part: pre-petition mortgage payments, court allowed fees and costs, interest on arrears, post petition on-going payments, etc). As will be apparent to those skilled in bankruptcy matters, the payment application in accordance with the court-confirmed plan may be quite different from how payments for a loan are typically applied such as being applied to the payments for the contractual amount due on the loan and any outstanding fees or costs associated with the loan General accounting methods are utilized by loan servicing systems. For example, each pay period, usually monthly for a mortgage loan, the next payment is due per the loan contract. Loan servicing systems typically do not allow for multiple concurrent contractual due dates as often required for the duration of the bankruptcy (which can be up to five years) where a loan is in default at any time at bankruptcy filing or a subsequent default during the bankruptcy. Some loan servicing systems have been modified to attempt to allow recordation and application of multiple loan parts which are concurrent due dates required during a bankruptcy, i.e., pre-petition arrearage due date, post petition on-going due date, post petition arrearage/agreed order due, or a possible additional agreed order due date.
The loan servicer must maintain distinct comprehensive records of payments as a result of possible delinquencies at the time of the bankruptcy filing (i.e., pre-petition arrearages) and payments due after the bankruptcy filing date (i.e., post petition on-going payments). Generally, the post-petition payments are considered current as of the first month after the filing of bankruptcy and the payments must be applied as if they were, even though a loan servicer's system may show the post-petition payments to be contractually delinquent. Once a bankruptcy is filed, the debtor is deemed to be current on his payments (monthly mortgage payment as an example) effective with the month following the bankruptcy petition date. The entire delinquency existing on the loan at the time of the bankruptcy petition filing is put into a lump sum and called the pre-petition arrearage. The amount is put into a repayment plan as confirmed by the bankruptcy court and administered by the trustee. The pre-petition arrearage is usually spread out in smaller payments through the life of the bankruptcy, up to five years. The loan servicer must keep track of these pre-petition payments and apply them, as they are received from the trustee, towards the monthly payments, fees and costs that were due at the time of the petition filing per the confirmed plan. In addition, the now “current” post petition on-going mortgage payment (in this example) are coming in as well from either the debtor directly or from the trustee in some jurisdictions. These payments must be applied to the debtor's account as current payments and reflected as such on the loan servicer's system and subsequent reporting mechanisms. This is true also for any additional delinquency that occurs with the post petition on-going payments in the form of a court ordered agreed order after the petition filing. The loan servicer's system must keep track of this third payment and its due date as well. Sanctions and penalties may be assessed by the bankruptcy court for failure to do so properly.
In most jurisdictions, the debtor makes post-petition ‘current’ on-going loan payments directly to the creditor, not to the trustee, but the debtor makes pre-petition payments to the trustee who is responsible for managing the pre-petition arrearages. However, in some jurisdictions, the trustee manages both pre-petition arrearages and post petition payments, as well as some post petition agreed order payments. In those jurisdictions where the trustee exercises control over both the pre-petition and post-petition payments, the trustee and the loan servicer must keep track of both pre-petition and post-petition payments and the loan servicer must identify and apply these payments in accordance with the court confirmed plan.
Further difficulties arise because, in the case of most mortgage loans, post petition on-going monthly payment amounts often change depending on, for example, escrow analysis or adjustable rate mortgages. If the monthly on-going payment amount changes, the trustee needs to adjust accordingly and remit the correct amount to satisfy the terms of the mortgage according to the contract between the debtor and the creditor. Some loans, as in the case of many mortgage loans, per the mortgage contract include in the monthly payment principal, interest and escrow payments for property taxes on the collateral home, as well as home insurance, mortgage insurance premiums, etc. Because property taxes and home owners insurance are usually subject to change each year, the contract allows for an analysis of the escrowed amount, it is usually done annually. Depending on the outcome of the escrow analysis, the monthly escrowed amount may stay the same, increase or decrease. The on-going monthly mortgage payment must change accordingly so as not to cause a gross overage or shortage in the debtor's escrow account. Similarly, adjustable rate mortgages, per the contract, allow for changes in the interest rate for certain periods of the life of the loan, causing the total monthly on-going payment to change depending on the new interest rate, usually annually. The change in the required remittance amount of the post petition on-going payment, if being administered by the trustee may result in problems and some jurisdictions require a court order to make any change to this amount as it changes the court confirmed plan.
Often during the bankruptcy period, disputes arise whether the debtor has made certain payments and/or whether the payments were actually applied to the correct claims or loan part: pre-petition, post petition or agreed order. At court hearings to resolve such disputes, bankruptcy judges and trustees often require reports showing accurate status of the payments and the claims. However, due to the foregoing problems, accurate reports of the status of the payments and the claims are often difficult to create.
There exist a need for a system and a method that provide a solution for the foregoing problems. There exists a need for a system and method that assists creditors and loan servicers to efficiently manage bankruptcy related loan payments and claims.